Cost-per-thousand is calculated by using the following formula:

Cost of advertising schedule purchased CPM = 1,000 gross impressions

Cost-per-point is calculated by using the following formula:

Cost of advertising schedule purchased
CPP = gross rating points (GRPs or “grips”)

Some explanations: The area being evaluated might be a country, such as the United States, or a television market, such as New York. The major networks cover virtually all of the United States, and their audiences are measured by ACNielsen, the company that provides television networks, television stations, and advertisers with audience measurement, or rating, in formation.

Television markets typically cover an area inside a circle with a radius of about 75 miles from television stations’ transmitter sites plus those homes reached by cable television systems that carry local TV station signals. Such an area is referred to as a “designated marketing area” (DMA) by ACNielsen. DMAs can encompass several counties and many cities and are usually designated by the largest city in the area. For example, the New York market includes Newark, New Jersey; Long Island and White Plains, New York; and Stamford, Connecticut.

The average television network program achieves about an 11.0 rating, which means it reaches 11 percent of the 94 million homes in the United States with television sets, or approximately 10.3 million homes. If an advertiser were to buy 10 commercials each with a rating of 11.0 on a network (ABC, for example), then it would make 10 times 10.3 million, or 103 million gross impressions. If ABC charged an average of $150,000 per 30-second commercial (the typical television commercial length), the total cost of a 10-commercial schedule would be $1.5 million. The CPM of the schedule would be:

$1.5 million
CPM = 103,000 (103 million gross impressions / 1,000)
CPM = $14.56 ($1.5 million divided by 103,000; the cost of making 1,000 impressions)

Advertisers and their advertising agencies and media-buying services evaluate television networks based on CPM because it is a good comparative measure of media efficiency across several media. Thus, the efficiency of reaching 1,000 viewers with the above theoretical schedule on ABC could be compared, for example, with how much it cost to reach 1,000 readers with an ad in Cosmopolitan.

There are two primary buying methods, or markets, in which advertising time is purchased on network television. These are referred to as the “upfront” market and the “scatter” market. The upfront buying market is usually active in the spring of each year. Advertisers place orders for commercials that will appear in television programs run during the television season beginning in the fall of each year. By buying in advance and committing for a full network season (which runs until roughly the second week in April) advertisers are given lower prices than they would pay in the later, scatter, market. The scatter market is active at a period much closer to the actual time when the advertising is to appear. Advertisers may purchase time in September, for example, in order for their ads to run during a fourth-quarter schedule, from October through December.

The networks give advertisers CPM guarantees for buying in the upfront market. If a network does not deliver the guaranteed ratings, it will run free commercials, called “make-goods,” to compensate for the rating shortfall.

In the past, CPMs for television networks have been based on the number of households watching. However, the use of newer technologies such as VCRs and cable television networks has increasingly fragmented the television audience. Recognizing this change, advertisers have tended to evaluate and compare network schedules based on persons reached rather than on households. Even more specifically, they have based their analysis and spending on numbers of persons within demographic groups. The two most desirable demographics for advertisers are women 18 to 49 years old and all adults 25 to 54.

Advertisers evaluate local television stations based on cost-per-point because the method provides a good comparative measure of media efficiency within a broadcast medium. Rating points are also used by advertising agency media departments as a planning tool to make very rough estimates of how many times an average viewer might be reached by a particular advertisement placed within the television schedule. For example, a media plan might call for 300 rating points to be purchased in a television market with the hope that 100 percent of the viewers in the market might see a commercial three times (a frequency of three). Thus, using rating points and CPP serves both an evaluative function and a planning function.